Despite the success of the Xbox, that was not Microsoft Corp.'s (MSFT) first choice plan in the gaming space, according to an IGN interview with a former Microsoft executive. Joachim Kempin, who was VP of Windows Sales at Microsoft for 20 years starting in 1983, says his former employer only decided to build the Xbox after a falling out with Japanese gaming giant Sony Corp. (TYO:6758).

I. Sony Console Worried Gates

The original Xbox and its successor, the Xbox 360, had their low points (red rings of death, for example), but have established themselves as a popular console gaming option, selling millions of units. The gaming unit is perceived as one of Microsoft's strong performing businesses.

Perhaps predicting both the rise of the console and tablet as replacements/challengers to the traditional PC, Bill Gates reportedly in the 1990s sounded the alarm when Sony announced the original PlayStation. Seeing Sony jump into the market, Microsoft became determined to beat its former partner, who was turning its back on PC gaming for a non-Microsoft alternative.

Describes Mr. Kempin:

The main reason was to stop Sony. You see, Sony and Microsoft…they never had a very friendly relationship, okay? And this wasn’t because Microsoft didn’t want that.

Sony was always very arm’s length with Microsoft. Yeah, they bought Windows for their PCs but when you really take a hard look at that, they were never Microsoft’s friend... but as soon as they came out with a video console, Microsoft just looked at that and said 'well, we have to beat them, so let’s do our own.

The original PlayStation launched in 1994. Then in 2000 Sony introduced the PlayStation 2, which added PC-like media player functionality and broader support for online gaming on third-party servers. A year later Microsoft countered with the Xbox.

II. Crafting a Console

The payoff of consoles -- by Sony's model, at least -- has traditionally been the licensing fees paid by game publishers. The hardware itself is often sold at-cost, or even at a modest loss. For that reason Microsoft had trouble convincing a PC maker to hop onboard the Xbox experiment.

Joachim Kempin, a 20 year veteran of Microsoft is spilling the dirt on the history of the Xbox.
[Image Source: Twitter]

Recalls Mr. Kempin, "I went out to several PC manufacturers and tried to beg them to do the Xbox thing and keep the device manufacturing out of Microsoft. The guys were smart enough not to bite, because they studied the Sony model and saw that Sony could not make money on that hardware model, ever. So they supplemented it with software royalties, and Microsoft copied that model."

As for Xbox profitability, he argues that developers have always been the winners; that Microsoft has managed to break-even, but not do much better than that. He comments, "They’re just maybe a little bit above breakeven, that’s all there is. This is not a big money-making machine for Microsoft."

A former Microsoft exec. claims the Xbox is not a big money-maker for the tech giant.
[Image Source: Gamasutra]

Microsoft is currently diving into a third-generation console, which is expected to launch this holiday season. After trumping Sony in the last generation (dubbed by some as the "seventh-generation") of consoles, there are some trouble signs for the upcoming Xbox 720. While the spec looks somewhat similar to Sony, Sony's hardware is reportedly slightly more powerful and considerably easier to develop for.

Microsoft also may alienate customers with its stance on used games; reportedly it is tying purchases to your Xbox Live account, as a means of stopping game resale (which it earns no cut from). Sony, while a long time support of strict digital rights management, has not yet announced a similar anti-resale provision.

quote: MS knew they had dominant control of the PC software market, and so they took a distributed approach to attempting to head off whatever the next potential threat might be.

What burns me is that Microsoft threw the PC under the bus at the expense of the XBox. They either shut down their PC game developers (ACES, FASA, Ensemble) or had them go XBox exclusive (Bungie).

It makes sense from their perspective, they most likely have a gamer locked down with a Windows license anyway. They're not going to make any more money from them unless they happen to buy an MS published game (Age Of Empires, etc). Why not sell that same gamer a closed-platform where Microsoft gets license fees from every game and hardware accessory sold? Makes sense even though it sucked for PC gamers.

Its funny how Valve outsmarted them with Steam though, now they're the gatekeepers to gamer profits on the PC. I'm not sure that Microsoft could have gotten away with it though. Aside from being surprisingly bad at making software (GFWL is a complete disaster), screams of "anti-trust" from people over MS making a digital storefront in the Windows XP era would have been insane. And of course Valve has made Steam cross-platform, also working on OS X, the PS3 (very limited), and now Linux.

quote: Anything that they thought could be a potential avenue of attack, they would try to nip in the bud.

And so, MS was probably a bit surprised when the attack came in the form of phones and tablets. After all, they'd already gone there.